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Spooky Friday Morning

I'm no longer apologizing for being skeptical into the rallies.

Yesterday was tough as I made a series of bearish calls in the afternoon as the Dow hit 9,200 which were ingenious at 3:45 as the Dow broke 9,050 but had us very nervous as the Dow went right back to 9,200 just 10 minutes later.  Still, we held fast as I have my overwhelming concern that the weekend will arrive as scheduled this afternoon and we have a tough data day today and, most importantly – we STILL have not made our levels.  A buy program or a sell program can only move the market so far until it runs into real resistance and that's what we take full advantage of with our intra-day trading.

David Fry summed up yesterday's action perfectly: "Yep, it was that kind of day. Was there any good news to account for an up day? Absolutely nothing, unless you think the GDP data falling a little less than expected was something to place bets on.  Nope, the market is just oversold and this is the end-of-month prop job mutual funds and a few others need…  So desperate are bullish tape painters they ignored San Francisco Fed President Janet Yellen’s statement that “…recent economic data is deeply worrisome and the economy is likely to contract significantly in the fourth quarter.” Sure, that’s really bullish!"  I also strongly recommend linking to David's column as he has a great series of charts that give a nice overview of where we are at the moment.

We have some very scary Personal Income and Spending data hitting us at 8:30 followed by the downwardly creepy Chicago PMI at 9:45 and the gloomy Michigan Consumer Sentiment for October, which may be revised below 50, more than 10% down from September.  Also sending chills down my spine was a WSJ story on the conference of the Turnaround Management Association, who are expecting a banner year in '09.  "We're all salivating. Wait. Don't say that," said one bankruptcy lawyer. "This is clearly the most devastating economic situation I've seen in my 40 years. I would say there is some distress even among the distressed-debt community," said Henry Miller, co-founder of the turnaround firm Miller Buckfire. Revenue is up by about one-third this year, he said. "Many of the patients are getting to us too late, I fear."  I like that he thinks of himself as a doctor performing emergency surgery…

[q.gif]"I am like an air-traffic controller with five planes trying to land at once. And they are all on fire," said Gregory Segall, managing partner at Versa Capital Management Inc., a $1 billion distressed-investment fund in Philadelphia. "Our greatest competition to do a deal is liquidation, getting the deal done before the bank or lender pulls the plug on a company," he said.  Through the first nine months of 2008, Standard & Poor's Corp. said that 66 companies have defaulted on $218 billion in rated corporate debt. That compares with 53 companies defaulting on $11 billion in rated debt for all of 2006 and 2007.  Mr. Miller and others estimate there is $2.3 trillion in leveraged and high-yield loans right now, with about one-quarter of that rated CCC or lower — a subinvestment grade rating that indicates a higher likelihood of default. Much of it comes dues in 2009 and 2010BOO!

Bill Gross put out a predictably scary newsletter this morning calling the economic collapse: "a nuclear implosion – destructive fusion not controllable fission."  The article is a good read and Bill does say, however, that "perhaps over the next few weeks or months, when deleveraging of the private sector is met by the leveraging up of the government sectors: the TARP, CPFF, and MMIFF will inject over a trillion dollars of liquidity into the system over a short period of time. At that point, our nuclear atom will begin to stabilize and it should be safer to move a little distance back out toward the perimeter where yields and potential returns are very attractive."  Obviously, Mr. Gross is a student of my Stock Market Physics class and agrees with my underlying bullish premise – $1Tn is a LOT of money and it has to move the markets at some point.

Speaking of Physics, we have been applying some fundamental market laws to trades this week that are based on the premise that there IS a limit to how low a stock can go and we've been taking advantage of the outrageous premiums that are reflected in the options contracts to make interesting plays.  One I saw yesterday during member chat is a great example of simple option plays you can make that can generate a significant return – even in these terrible markets.  We looked at LVS, which closed at $10.38 and the play is to buy the stock, sell the Nov $10 call for $2.58 (prices at close) and also sell the Nov $10 puts for $2.20.  As you are collecting $4.78 in credits, the net cost of entry is $5.60. 

There are two possible outcomes on Nov 21st (option expiration day):  If LVS closes above $10, you will be called away from your position at $10, a 78% gain off your $5.60 entry.  You will not owe your put holder any money as the stock is over the $10 strike price.  If the stock finishes below $10, you will not owe your caller any money but an additional round of LVS shares will be put to you at $10.  That $10 plus your $5.60 net entry on the first round will put you into LVS for an average cost of $7.80, which is a 25% discount off the current price.  So the point to this trade is – as long as you feel you wouln't mind owning LVS for $7.80 long term – this is not a scary play at all!  These are the kind of trades you SHOULD be making in these markets, taking advantage of the fears of others that is causing implied volatility to skyrocket.

Options are a way to mitigate fear in a scary market and those of you who own stocks are doing yourself a grave disservice by ignoring the very profitable strategies that can be employed by buying protective puts (especially against dividend paying stocks) or selling calls to others to generate a steady monthly income.  Why sit on your $19.35 share of GE hoping it will go up when someone is willing to pay you $2.20 to buy your stock from you for $19 on Dec 19th?  The net $1.85 call away is 9.5% of your stock price in 50 days - far outpacing the 6.5% annual dividend.  If you intend to hold a stock through thick and thin, then what's so terrible about lowering your basis to $17.15?  If you do get called away, you can always buy more…

Warren Buffett rightly said "Be greedy when others are fearful" and that's the underlying philosophy to the trades we've been going after for the past few weeks, these wild market swings are great entry opportunities for long and short plays but we prefer to take advantage of premiums by being mainly a seller, not a buyer of options.  Another great trick in a volatile market is, rather than buying a stock you think is "cheap," simply selling the put.  Selling a put gives someone the right to force you to buy a stock for a certain price on a certain date so, if you want to by GS (along with Mr. Buffett) on yesterday's dip to $89, you can give yourself an automatic discount by selling the November $85 puts for $8.  You collect $8 up front and, if the stock is put to you at $85 by 11/21, your net entry is just $77, 13% less than the current price.  If GS continues higher, you will NOT end up with the stock (that is the "downside," the lack of upside) but you will keep the $8 as the obligation expires – not a bad profit for 2 weeks without ever actually taking ownership of the stock. 

There are, of course, more complex strategies that can benefit you on both ends but it amazes me how many people have money tied up in virtual portfolios and just let them lay there, not even attempting to unlock the revenue generating potential that can be realized through option selling.  It's a strategy well worth checking out, especially for many of you who depend on getting a monthly income from dividends and are seeing your virtual portfolio values shrink and feel you may need to sell stocks at these lows to make ends meet – that's why I'm discussing this now as I've spoken to some new members in this situation and it seems to be all too common this month and, from my perspective, there is always an option

Japan may be out of options as they cut their 0.5% rate to 0.3%, which is a 40% cut but investors didn't see it that way and the Nikkei sold off 5% on the button, back down to 8,576, which is 53% off the 2007 highs.  The Hang Seng pegged the 2.5% rule on the nose as well while Shanghai fell 2% to close the week sadly at 175, over 70% off the high of 588.  The Baltic Dry Index fell 5% as well as commodities continue their global collapse – which is great for us as we stayed short on oil into that BS rally.  In pre-market trading, oil dipped to $63 a barrel and Brent crude was down to $60 and threatens to break that mark if US equities don't save us today.  News that should not be ignored out of India is a series of 13 coordinated bombings that killed 61 people, injuring 300 others in an escalation of separatist violence. 

Europe is mixed ahead of the US open with not much news over there.  There is still the anticipation of an ECB cut next week and there will be heavy disappointment if it doesn't come through.  US indexes have recovered from some disappointing futures and look to open flat as well but unless we go flying through the levels we laid out in yesterday's post, we're certainly going to remain well covered into the weekend.  Consumer spending was down 0.3%, about what was expected and the dollar is gathering strength again so it should be a technical trading day overall. 

If nothing blows up over the weekend and we don't have any countries or major corporations entering bankruptcy, we may be able to make some progress next week but, until we get the majority of our indexes over the 40% mark – let's continue to proceed with caution and remain well hedged.


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  1. Phil:
    Good Morning:

    I still do not understand the:
    1) selection of a protective position, what strike, how far out in time,
    2) repositioning of the protective position, in down and upmarket,
    Please be patient and tell me in simple words,
    sometimes you say I should not react to a change in market, sometimes you say, I should have done it.
    Thanks a lot.

  2. Phil,
    Any quick thoughts on BEAV?  Trading at 6x 2009 EPS (revised last week) and 0.8x book value.  Could break out if BA’s union deal works out this weekend.

  3. RMM – better for a weekend discussion but the main problem you have is you want a single rule when the answer is always dependent on many factors that shift from day to day or even hour to hour in this market.  You tend to overreact to short-term moves and you lack an undelying investing premise, which causes you to overtrade.  I’d be happy to discuss it on the weekend but we’re going to be a little busy this morning I think! 

    Qs off to a bad start, below our 32.50 mark and that has been, by far, our easiest market indicator to follow. 

    BEAV/Fab – I like them, they are one of the Boeing Buddies and have been very unfairly beaten down with BA.  We missed them on the lows so I’d wait until next week to take an entry unless you want to take a chance here and naked sell the $12.50s at $1.18 in anticipation of buying the stock next week and selling the $12.50 (or maybe $10) puts for $1.50+, which would put you in for $10 or less, which was pretty much the pre-earnings low.

  4. GM all. 

    Phil, "there’s always an option"--That’s a great title for something--blog, book, article, Phil’s Greatest Hits album…

  5. Phil: ok, over the weekend.
    I have established the FXP as you outlined yesterday, now we wait for FXP to rise a lot.

    Yesterday I sold some of my AAPL calls, today I have full cover.

  6. this mornings pre-market cnbc segment with that idiot trader with the ‘GOP’ name tag along with ex-governor sunnunu playing tag team with the microphone and expounding complete statistically incorrect rubbish about democratic congress’ being bad for the stock market just has to make a person sick!  and you would think that some of the more reputable members of cnbc’s morning team had to be embarrassed by this crap!!

  7. Hi Phil,
    OK – so there seems to be a disagreement among Elliott wave followers as to whether wave 3 has ended or not.  Do you have an opinion on this?  :)

  8. Have anyone tried shorting EEV or FXP?  Usually can’t find shares to short.

  9. BTW – the levels to watch for (from my brother) are 929 on the SPX and 1285 on the NDX.  A break below these confirms that the downtrend continues…

  10. ICE blasting off.. again.  At least I’m fully covered.

  11. Teck bought FDG…and is paying a nice 10% dividend.  Looks like TCK is into copper, zinc, gold and now coal..??  P/E is 3.4 (trailing and forward), and Debt/Equity is 0.16.  As a comparitor, PCU has a P/E ~6, and D/E 0.34…..

  12. Scobe – is another URL I just haven’t gotten around to using yet…

    AAPL/RMM – aren’t you glad I told you to stay covered at $110?

    CNBC/Highlander – You know McCain’s in trouble when they shove Kudlow at us in the morning so we can get an  infomercial for McCain to combat Obama’s the other day.  Unfortunately, after listening to this BS since 4am, I’m starting to think McCain can win!

    Check out the Russell, way outperforming today. 

    Elliott wave/Patrick – I’m not sure if that model can hold up against the combination of massive liquidation followed by massive governement intervention.  Technically, in a bear market, wave 3 ending would lead only to a bear market rally and that is what I expect, and Bill Gross even expects in the newsletter this morning but it makes me a little nervous that so many people are now expecting it.  Art Cashin is right when he grouses that we still haven’t had the massive capitulation event we need to really clear the decks but the longer we hold up without crossing below 50%, the better our chances are of avoiding the Asian disaster levels but we sure are not out of the woods yet as Asia can’t get back over 50% and and Europe is below 40% and it’s very doubtful the US is going to be able to lift the global markets by itself.

    EEV/Fab – Those are dangerous shorts!  You are talking about shorting an ultra-short of emerging markets?  That’s like the answer to the Jeopardy question "What is the most volatile thing you can think of?"  8-)

    Levels/Patrick – So he’s looking for a breakdown?

    Holy crap - Chicago PMI at 37!  52 was expected and 57 was last month and there is a rally on that news????  Something strange is going on…

  13. Phil
    On the weekend (any suggestions)
    I will not be able to trade or be at my computer on Tuesday or Wednesday.
    Do you have suggestion how to leave my account ?

    I have Monday to make changes


  14. Phil: my AAPL callers are nov 100 and nov 105.

  15. EEV / FXP short – yes, I shorted FXP before cos I track HSI / HSCE quite closely.  EEV is a total crapshoot with Brazil, China, Korea, Taiwan, Russia, South Africa, etc. in it.  You could short puts against it too.

  16. Strange/Phil:  It’s end of month painting and the election.  I really don’t think we’ll go down until Wednesday next week.

  17. GS – still stuck below $90

  18. Phil,
    Yes, a breakdown is confirmed below those levels.  Above them is a crapshoot, but he still thnks (Elliott Wave analysis plus head and shoulders analysis plus pennant formation follow through analysis) that we are ending wave iv of 3, and should start v of 3 any time – with a scary downside target.

  19. G’Day to all.
    Phil Ref C. I have full position of few hundred contracts in Nov17.5C/Jan17.5C calendar. For last week, or more, I am “begging” MM to roll me to 2x to Nov15C/Jan15C for $1Db in 4-legged combo trade. Rolling each leg of my position individually require either outlay of large amount of cash (callers roll first) or margin (rolling myself first). I am thinking to split this roll for bunch of 50 contracts rolling to 100 contracts, any better suggestion? What you think C will do prior to X-mas rally? Do you think that we will have Sta Clause rally up, down, or sidewise? Thanks

  20. TCK does look way better than $10 and that’s a good one to sell $10 calls and puts for $2.50 along with buying the stock for a net $7.50 entry ($8.75 avg if put to you under $10).  This is really the last day to be able to make these plays for Nov as time gets too short next week.

    QCMike – It depends how you are now.  I’d say no more than 50/50, even if we close positive as this may all be end of month tape painting and there could be hell to pay on Monday.  Also, traders have been conditioned to expecting stimulus over the weekend but there’s nothing I see pending that justifies that and this Monday we got a big sell-off as there was no early rate cut.  The Nikkei dove into the close and the Hang Seng was suspiciously saved from a much 5% dip by buying into the close (still closed down 2.5%) so we’ll have to watch Europe carefully with the FTSE skating along the 4,200 line, the CAC unable to get back over 3,400 and the DAX not looking too strong at 4,900 (5,000 was rejected mid-day) and breaking below 4,800 would be very bad.

    We’ll see if the Russell can hang onto 510 and if the NYSE can get back over 6,000.  The Dow needs to hold 9,200 through lunch along with S&P 955.  A lot of the pop we have now is based on oil getting bought back up and OIH and XLE are both 2.5% off their opening lows and that’s accounting for most of the gains so far.  The miners also turned it around as commodities bounced on inflation concerns so just another crazy day in the markets so far…

    AAPL/RMM – on the $100 callers.   They were $15 yesterday and came down to $10, that’s a 33% improvement, if you set stops you might be able to take advantage of some of these quick moves and pick up an extra dollar here and there, which really adds up.  Now they are $12 and, if they fall to $10 again I wouldn’t be so quick to remove them as it’s a dangerous spot on a second test (first test is probably a bounce, second test is maybe a bounce, third test is often a failure) but let’s say AAPL goes to $100, then you really have to consider lightening up a little, looking for a bounce and, if they break lower than $100, you can sell the $95s.

    EEV/Fab – Yeah, I’ll have to look at that but I prefer the FXP because it’s easier to figure out what China will do than that basket of mixed nuts.

    Election/Matt – Actually an Obama win could bring in a lot of overseas capital as the biggest concern they have of the US is runaway spending blowing up the deficit and, without making a political statement, they see McCain as a continuation of Bush and there’s no Fox in Europe to tell them that Bush hasn’t been a total catastrophe for this country.

    Waves/Patrick – I still have my 1929-1932 chart handy as I’m very concerned that we get maybe a bear market boost through the spring back to maybe 10,500-11,000 followed by the REAL crash which will give you that scary downside that seems unimagineable to us now.  If the credit market doesn’t unfreeze, we may never get to 10,500 and that downside pull is going to be very strong, especially if retail heads below expectations – Imagine all that inventory piling up with companies unable to pay back the loans they took to make it…
    C/Bro – If you are rolling to 2x the $15s you are spending a lot of cash.  You are going from .77 to 2x $1.48 and your cover is going from .20 to 2x .63 so you are taking $1.16 out of pocket to make the trade.  Why not just roll down for +.70 and roll the caller to the Nov $15s for +.40 and leave it at that.  If you do want to spend more money you can simply add the spread of the March $15s at $1.98 and sell the Dec $15s at $1.11 against them, leaving the $17.50s in place as an upside buffer in case C breaks way up (as you can always roll the Dec $15 callers up to 2x the $17.50s).   I do think that, barring a major financial failure, C should start to come around but they sure have been disappointing so far.

  21. Is ICE finally melting?

  22. Phil – I’d like to make a correction (not usual) to a statement in your morning post:
    "If LVS closes above $10, you will be called away from your position at $10, a 78% gain of your $5.6 entry"…

    Due to margin requirement on the naked PUT sold (which can equal to 25% of the underlying symbol plus the value of the naked PUT sold), the basis of the entry is at least $7.8 or higher depending on whether you have portfolio margin or not.  So the gain is less than 78%, it’s somewhere in the 30% range due to margin requirement.

  23. Phil,
    One other thought.  I have heard a number of people (you and Bill Gross for example) say that they current Fed Policy will be ultimately inflationary and that the long bond yields will definitely be going up. 
    OK, has anyone thought about the implications of this on banks?  For example, if the 10 year goes back above 5% (very likely) and GSEs continue to have a premium on mortgage backed securities (also very likely) won’t effective mortgage rates have to rise, perhaps dramatically?  The question then becomes, how will the performing mortgages at 6% be priced when all new issues are at 8% or above?  Another round of write downs – this time on performing bonds? 
    The other thing to keep in mind is that duration expectations will also expand rapidly.  In an environmnet of lowering (or low) interest rates and high mortage turn-over (due to refis etc.), mortgage duration averages less than 5 years.  But in an environmnet of rising interest rates (once again, unavoidable), duration will have to expand, increasing the neet liability…

  24. Phil -Thx

  25. Phil:
    you can watch FOX in Europe, but Europe does hardly need them to know that BUSH has been a catastrophe for the USA AND the world.

  26. Best market movers so far are the Financials, especially regional banks.  JPM with a good move today, GS still bad.  Lots of good moves in Drugs AND Drug Stores so that’s interesting and some of the E&P guys are bouncing. 

    Whatever nutcase was relentlessly selling BUD seems to have gone away and they are holding up now.

    Man, you can see why I picked the RUT as my positive market play!  Up 5% again today.  In a vaccum, it’s a good sign to see them coming back but we need 515 to hold and they aren’t even back to last week until they hit 546 so it’s nothing to hang a broader rally cap on.

    ICE/Matt – here’s a knock on their plan.

    LVS/Peter – OK, that’s right, I’m only counting what is laid out, I guess making the assumption that the margin isn’t being put to better use does not apply to everyone but what would the proper ROI calculation be?

    Morgages/Patrick – Absolutely they go up.  The homebuyer competes with everyone else for money and if a home is percieved to be as risky as a junk bond (now 16%) then the morgages will be priced accordingly and that’s why I’m really pissed that the administration is not doing anything to bail out the homeowner.  If we don’t stabilize housing prices then all the stuff they are doing now won’t even amount to putting a finger in the dyke.  That is the huge floor with this "trickle down" bailout, you are improving the loan quality of corporate bonds while encouraging banks to liquidate loan portfolios which can drive down the price of housing further and make housing a far riskier investment.  Of course, this is to be expected under my ‘land grab" scenario where they are purposely trying to destroy middle class wealth while driving prices down to levels that allow the wealthy to come in (with cheap government loans) and buy up all the land again at half price or less.

  27. Phil, I have IWM Dec. 45 Puts (basis is $3.24, currently $2.09).  This rally is befuddling given the hard economic numbers and reality. Why is the Russell up?  Should I hold, roll, or get out?  There is still time.  What do you think?

  28. Phil,
    What is the probability of the real crash you had mentioned at 10:35 am today?  Do you really see consumer spending tanking this holiday season?  In the past I have always seen the retails stores mark the price down so low, tempting the consumers to bite the bait.

  29. Nobody told BBY about the consumer.

  30. LVS/margin – Since I did the trade, we should calculate the gain from the Covered Call separately from the naked PUT.  The Covered Call gain is straightforward, but naked PUT has variable margin requirement based on the current stock price and which brokerage.  We can assume that the margin requirement is 25% of the underlying symbol price, plus the value of the PUT sold.  The danger with the PUT is that the margin goes up when the price goes down, and you can be margin called.

  31. We should keep an eye on SCC (ultra-short Consumer Services) as they may have been irrationally sold off this week.  Big holdings there are WMT, MCD, DIS, CVS, HD, LOW, TGT, WAG, COST… who are doing well at the moment but this thing could turn very ugly if Christmas is a humbug.  They don’t have options but it’s a good health indicator to watch now that the top holdings have had their relief rally.

    HIG finally stopped falling.

    IWM/Bon V – Well I picked them as my favorite upside index as they seem way oversold down here.  I think I wrote last week that there is too much negative sentiment on Main Street (which the Russell pretty much represents) as smaller companies have smaller borrowing needs and regional banks are still happy to lend and consumers aren’t that dead yet.  Since you are only down $1, you can always sell the $49 puts for $2 and roll yourself out to the Jan $50 puts, you’ll collect the premium with a $1 spread and you only need to retain the current value of the Jan $45 puts ($2.75) to be back on track and that would take a 10% move on the RUT from here – I’m not THAT bullish!

    Crash/Malai – My main worry right now is that a country could fail.  The IMF has $200Bn and that’s not enough to save Spain, Russia, Iran (yes, we would have to save them), Turkey, Venezuela or Argentina – all of whom are shaky.  If a country goes down we go right back to a total bank freeze and that could cause a bank failure which could cause a run on the banks, which would be a catastrophe as the FDIC only actually has $48Bn to cover the $20Tn people think they have in the banks.  That’s why I like gold as a disaster hedge, especially with the great leverage GLD gives you.

    BBY/DB – I think electronics will hold up well as people buy stuff for staying home, something marketers call "cocooning," which often happens during bad economic times.   JPM upgraded them today and anyway, IPods have to be sold somewhere…

    LVS/Peter – Yes, the main point to these trades is you MUST be willing to buy 2x at the net price otherwise you should not consider them.  That’s why they are good to take AFTER we set what looks like an interim floor as it gives us a pretty good chance of holding the line and, if you decide to stay with it, a pretty good path to turning right around and selling Dec $7.50s if you have to, lowering the basis to near $6 with a 20% upside – that’s not bad for a stock that loses 25% in two weeks!

    This is not a very pretty rally.

  32. Yesterday’s GS long and ICE short just aint working. What’s a good stop out % for those of you who actually have trading plans? Options are so volatile that 15-25% swings can happen in a matter of minutes/hours.

  33. Phil:
    I am reading a book about the great depression, frightening how many things are similar to what happened then. Sam happenings, same words.
    You are right about the danger of a country failure.

  34. Airlines still in a good mood, actually in a great mood as oil breaks below $65.  RYAAY is the lagger and the March $20s aren’t bad at $6.20 as you can sell the $22.50s for $2.50 but I’d wait on the sale as these guys could hit $25 before they get resistance.

    Dan – GS long is a good play.  Even in a poor market they are oversold here (Buffett is in at $115).  ICE short is speculative and will take time to play out.  They are trading off the excitement of getting into the CDO game that’s going to have legs for a few days but they should at least get some profit taking at some point.

    Depression/RMM - Yes it’s very depressing.  I can’t believe Bernanke, who supposedly is a scholar of the depression, didn’t see this coming…

    RUT up to 7.5% at 527, good level to watch.  NYSE broke 6,000 and S&P over 960 with Nas over 1,700.  We still need the Qs to break 33 (about 1,725) as that was our big trouble sign yesterday.   AAPL red is always troubling though, even RIMM is up 6% today.  GOOG seems to be perking up…

  35. DanW:  I covered by ice short yesterday.  I uncovered recently but will cover back up if they go ver 86 which is very possible.  As for a stop, if you want one, I would say at today’s high.  I’m just going to ride it out as I think it’ll be back down next week.

  36. About the time our original 13 states adopted their new constitution, Alexander Tyler, a Scottish history professor at the University of Edinburgh, had this to say about the fall of the Athenian Republic some 2,000 years prior:

    "A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship."

  37. Phil – Ref your gold protection. I have read in history books that one of the greatest Democrats forbid US persons to own gold of value more than $100, prior to devaluating $. This law was modified by pres G. Ford. Also, I heard a speech by M. Leibovit. He doubts GLD holdings b/c of lack of independent auditors.. Also, they GLD may be a subject to the confiscat… oops, mandatory exchange. So I hope that you can dig a deep hole in the backyard to bury the real thing in the darkness of the night, w/o having a cell phone on you, or GPS in the car. As you see I am cheerful optimist.


  38. They were both short-term spec plays (Novembers). The thing about ICE that pisses me off is that they printed $87 at the close last nite when the bid/ask was 82/83 and they opened up at 85 showing -$2 on the ticker. That smacks me as manipulation.

  39. Good quote Mike!  Now President seems like an annoying job but dictator is something I wouldn’t mind running for…

    I’m not liking the diminishing volumes of the past two weeks.  We had some serious volume on the sell-off but we’re more than 1/3 off those levels now, usually a reverse comes on a huge volume spike on a reversal day, which we kind of had on the 10th, but our performance since then has not indicated that that was a real bottom.  I think if we don’t hold 960 on the S&P today, the daily chart will look pretty ugly as people look ahead to November so let’s watch that line closely.

    LOL Bro – that is a little pessimistic.  I wonder about all the ETFs when push comes to shove but hoarding physical gold seems a bit silly to me (and you can’t sell front-month contracts against them).  I think if gold really takes off then people will buy GLD regardless of what Leibovit has to say but I’d sure be regularly rolling to cash in along the way as $2,000 gold will also let you put money into CDs at 18%…

    ICE/Dan – they are owned by GS, MS, BCS and other funds so manipulation is built into their DNA.

    This is a lot like yesterday, things can turn ugly if oil breaks down – now $64.49.

  40. BEAV ramping!

  41. Phil – your LVS call/put play works well in low prices (percentages ar ehigher). How about merging it with a bullish gold premise. I am looking at AUY. Buy stock at 4.88, sell Nov $5 for 0.45, sell Nov $5 put 0.60. This puts you in for 3.83 called away at $5 it is 30%, or double shares for 4.41 (well this is not that great, 10% discount). What do you think?

  42. Phil: not much going on,

    can you review my downside positions please:
    DIA PUT jan 89, covered 1/2 with nov86,
    DXD jan 75,
    SKF jan 130,

  43. Phil,
    It seems like the old adage "The bull goes up the stairs and the bear goes out the window" is reversed for a bear market.  Perhaps, "the bear goes down the fire escape while the bull straps on a rocket" is more appropriate for a bear market.

  44. UK just closed up 2.0%. Bit of a run up right at the end. Biggest looser would seem to be Barclays Bank ….
    Barclays fell 20 per cent to 163p on negative shareholder reaction to news that it was close to securing a £6bn cash injection from a consortium of Middle Eastern governments including the Qatar Investment Authority and an Abu Dhabi-based sovereign wealth fund.
    This would avoid the need for the bank to take cash from the Treasury, which would carry the added threat of restrictions on dividends and executive pay. But the terms of the deal, which could see Qatar and Abu Dhabi take control of a third of the bank, have provoked outrage… !!!!!!!!!!!!!!!

  45. To follow up DB’s quote on Barclay’s & Treasury borrowing:{dc2eabc9-d65b-4e5b-9081-854e6dd701ad}
    US Fed Discount Window Lending Drops For 2nd Straight Week

    WASHINGTON (Dow Jones)--Lending through the U.S. Federal Reserve’s discount window dropped for the second straight week as primary dealers scaled back borrowing while commercial banks continued borrowing at near-record levels, a weekly report released by the Federal Reserve on Thursday showed.
    Also, the Fed reported net portfolio holdings of $144.81 billion Wednesday in connection with a commercial paper purchase program it launched Monday.The figure marks the first disclosure of purchases against the backstop facility.
    The Fed said total borrowing at its discount window, including both depository institutions and primary dealers, fell to $369.76 billion Wednesday from $408.16 billion in the prior week. Total average daily borrowing also fell to $388.81 billion from $418.58 billion in the prior week.

  46. Phil
    What is the " collar " option ? Is it the same as " vertical spread " ? Thanks.

  47. Ash,
    Read the free book on the new member page, collar trades are chapter 13 I think…very good trade to read about!

  48. CROX made a big move the past 2 days.

    Does anyone else notice that CNBC has changed tone and is now cheerleading the markets?

    AUY/Marek – You get the most bang for your buck by hitting the buy point when you are right on a strike (assuming that strike is also about your target close) that pays a good premium.  So assuming you don’t have any major preference for AUY, HMY is a more attracive entry at $7.50 as you can sell the Nov puts and calls for $1.70 and doubles you up at $6.65, which is an 11% discount.  Of course, with either play, you can sell the Dec puts and calls now and do much better so it very much depends on how confident you are of staying in range for 2 weeks.   My other issue with AUY is they were down at $3 whereas HMY bottomed out at $5.70 so you need to take that into consideration since – if you are having the stock put to you, obviously things are not going well!

    Protection/RMM – With just 2 weeks left it’s a shame to not sell some premium.  We don’t think DIA is going lower than 8,200 so you are good with the $86 puts but you are violating the rules by not rolling up your Jan $89 puts when the $90 puts are less than .40 away and the $91 puts are .40 above those and the $92 puts are .46 above those so you need to roll to the $92 puts for $1.30 or less.  You can pay for that by selling another round of $86 puts for $2.60 as they don’t go in the money until $83 at which point your $92s are $9 in the money so little worry there as you can, of course roll those down another $5 in December.    DXDs move faster so you don’t want to cover too much but they are willing to pay you $3 for the $89 calls and that pays to roll your Jan $75s down to the $67s so right now you have nothing but an out of the money option that is losing money every day at $12.75 but, by selling the $89 caller you are moving $5 in the money with a $19 spread for no additonal cost.  To whatever extent these are serving as a hedge to the rest of your portfolio, you may want to keep some naked but we’re talking about a 10% drop in the Dow just to get DXD back to $85.  SKF is the same deal as you are on the money and you can just sell $170s for $8.50 and stay put as that’s 30% of your position off the table with a $40 spread and you know you can roll those way up in December and we’re pretty sure SKF tops out at $200. 

    Bull/Bear/Patrick – I think it makes sense that the inverse is true when the markets are inverted.  The behavior follows the same logic but most people are, of course, upside investors so all the sayings relate to that kind of investing.  Like "sell in may, go away" is the opposite of what a short seller would do (and I’ve been contemplating the idea that a bear investor can make more money in less time than a bull).

    BSC/DB – I would think the British wouldn’t be so Arab-phobic but we’re all going to have to get used to it as they haven’t spent all of the Trillions we’ve sent them the past few years yet.

    V is moving back up.  Ags holding up today, AAPL still down 2.5%, OIH right on 2.5% line, Oil is down 2.5% too at $64.50 but 2 hours to go at the NYMEX and oil almost never closes red on a Friday.  In fact, the USO $44 calls at $9.75 make an interesting mo play as they were $13 when oil was $67 on Wed yet they were $9.25 when oil was $62 on Tuesday so it’s a good percentage play on the usual shenanigans into the close.

  49. GS making a very sudden move!

  50. We seem to be getting into a compressed trading range, with upside follow through likely if the NDX breaks above 1345 and downside follow through likely below 1315.  If the break is up, I will cover my short.  if the break is down, probably take profits near 1280 for a bounce.

  51. Oh man, we missed PRU selling down to $24 this morning!  That is crazy cheap for them!  You can still sell the $25 puts for $4.35 due to the crazy sell-off or the $20s for $2.67 if you want to play it safe.

  52. Protection/RMM – With just 2 weeks left it’s a shame to not sell some premium.

    There are actually still three weeks left, but I can understand your making the mistake because this cycle already feels like it’s gone on forever.  A full five weeks is as long as it can go, right?

  53. "Rally" Question:  ??Have the Qs broken over $33 yet??

  54. JB

  55. 33 on the Qs corresponds (roughly) to 1340 on the NDX…

  56. And STILL no profit taking on the week………….

  57. 3 Weeks left/Eph – Damn, I hate it when I mix that up.  I keep thinking this expiration is early.  In that case, the premiums have dropped VERY hard for 3 weeks left, more so than can be explained by the VIX, especially on the upside which leads me to think that option players are still on the bear side OR there are a lot of people taking entries through put selling which may be distorting things (or people may be using puts to protect their new long positions as no one trusts the moves yet).

    Dow 9,350 was about the spike on Weds, if we don’t break 9,300 we can’t even take this seriously.  Russell past 7.5% at 529 so that”s a good sign if they can make 530.  I guess for the markets to get going, oil needs to get back over $65, now $64.25 so watch the break closely (about $53.50 on USO).  Wearing my fund hat, I can’t see buying into this weekend – too many things can go wrong but there is the painting the EOM issue so who knows where we close but that doesn’t mean we don’t give it all back on Monday.

    LNT has a bad Q on a disaster issue but guided up, they are a good deal at $30.75 if you want an upside energy play and they have a 5% dividend and $30s can be sold for $2 but you can probably get $3 if they bounce up.


  58. Stopped out.  Maybe a little early, but this doesn’t feel like a head fake to me.

  59. QQQQ’s over 33 (33.01) :)

  60. LVS $14! 

    9,362 is the exact top of Weds spike and that ran into massive, dramatic selling.  Progress looks good now but not too much volume conviction, more like a seller strike – the kind that leads to air pockets being formed under the gains but, if we break 9,362 we have to go with the flow, especially if the RUT holds 7.5%.  GS is leading the XLF to 5% gain and UYG, of course, is flying. 

    Wow, there goes 9,362 already, major buy button was hit…

  61. Wow.  ICE is a joke.  I totally see what you mean by having manipulation in its DNA.  That’s ok.  I’ve been able to milk a little on the silly spikes and drops.  I’m just careful to cover up quickly cuz there’s no telling where they take that thing.

    Hunch for the close:  DOW 298. 
    Based on:  Nothing really.  Just the election and end of the month stuff for mutual funds.

  62. I’m not buying into this rally yet. I’ve got some shorts for Nov 3rd and the rest is still sidelines.

  63. DRYS up to 18.50 and still climbing.  All bulk shippers are up over 5%.

  64. ..and if we do close up there.. I’ll be selling my longs EOD and just keeping my shorts.  Of course, I always hope to do that. ;)

  65. Wow Matt, I hope you meant 9298 or you the worst bear out there.

  66. eph/lol:  I meant +298 on the DOW.  Sorry for the confusion.

  67. I have been watching C and UYG 10 min daily charts and they almost mimic each other move for move.

  68. RMM
    You said last week you were looking at moving to Oregon.

  69. I wonder why I choose to earn a living from something (stock markets) I patently don’t understand :-)

  70. Singapore Steve:
    yes, give me some info where are nice places to live ??
    how much is a place with 2500 sqft.

  71. DRYS/Steve – that’s odd as the shipping inedex was down 5% so we are really ignoring fundamentals today!

    Man you guys get bullish easy…  We barely held 9,362 and you know the move up in oil is BS and AAPL is still red so what kind of rally is it?  I think the rally was on anticipation of Bernanke saying something good but he isn’t saying much at all, just talking about how the mortgage crisis happened – nothing he says here is likely to bail out the markets but someone seems to think it will…

  72. Bull/Phil:  I’m not bullish at all.  I’m just being realistic and hopping on the McCain Rally. ;)

  73. Oh well, BS or no we are off to the races!  540 is up 10% on the RUT, S&P right at 2.5% at 978, Dow right about there at 9,400 and NYSE at 6,120 so if we start getting through, we could be setting up for a big push.  On the whole, this really feels like a major fake push but we’re clearing all our 40%s with the NYSE 6,232 being the last hold-out and that was where we have to move to 50/50 bullish at least.  Nas is closest to losing it at 1,717 so that’s our downside warning signal now.

  74. Phil:
    my upside positions: please review:
    QLD calls apr 31, base 9.7$, 1/2 cover nov 30,
    SSO nov 30, 1/2 cover nov 28,

  75. Phil: ok, DIA puts, SKF, DXD all repositioned.

  76. ICE not moving up with this ‘rally’. GS trying to stay above 92 but meeting lots of resistance.

  77. Gee, look at oil go – what a huge surprise (end sarcasm font).   USO $44s at $12.55 but now you can sell the $48s for $9.80 leaving a free $4 spread or just cash the 30% gain – isn’t this fun?

    Unfortunately, we did wake up the sellers on that last bit as we tested our levels (which is why it’s so critical to pay attention to them) but anything can happen here. 

    Upside/RMM – I don’t like that cover, very bad if they break up.  You can roll to 2x the $35s even and you should – it’s still good cover but not so dangerous if they take off.  SSO - you covered with LOWER calls?  That’s another bearish play then… I would move the Nov $30s to the Dec $33s and roll the cover up to 2x the $33s all about even.

  78. FIG’s made a nice move in the last 3 days, going from a low of 2.7 to over 4 right now.

  79. Phil
    On dry shippers I track 11 of them on my charts and they are all up 4-13%

  80. JNJ  What do you think on an LTP of + Jan 11 60/-Nov 60 for $6.40.   I’m trying to find a bunch of easy spreads where I don’t need to worry about trading  them a lot.

  81. RMM
    Depends what you like in a place.  Between Corvallis and Eugene there are many places.  Just google real estate for here and you can sort by towns and price etc with slides shows of the homes. The coast is 45 minutes and the ski areas 2 hours away.    Right now I am trying to get a get a job in Eugene.  I miss my 6 figure income.

  82. What woke CROX up?  It must have been me because i was thinking about buying them when they were 1.79.   I did the same thing to with LVS when it was at 4.60 and did not get on the train. Now 15 bucks and climbinng.

  83. Same with HOV. Low of 2.84 3 days ago. Now 4.3.

  84. AAPL breaking 110.  next stop might be 115.  Anyone see any orders stacking up around those numbers?

  85. Someone unclogged GS. Still see a lot of fighting though.

  86. We are like kids in the candy store and Phil is yelling head fakes!

  87. APOL seems to be at resistance at 70.   I feel that this stock will stay here or break out.  Does not appear to want to fill the gap.  Had 3/4 cover with nov 65.   Rolled them to nov 70 for more premium  (1.70 more) for 3.20.   Rather than wait another week when it seems prudent to do now  because if I wait the 7-10 days it will likely cost me more and then the only option is to roll them out to the next month.  It also improves my delta advantage.
    Phil,  is this ok reasoning?

  88. Got out of GS even. Didnt feel safe going into the weekend and letting whatever premium expire.

  89. Phil:
    the FXP: not moving up ??

  90. Oh man.. I hope they don’t let us drift down till just before close and then spike up in the last 10 mins.. That would be cold.  And par for the course.

  91. With the VIX dropping 15% half of my longs lost money in this market!  Up only 1% today but I do have plenty of rent that I hope to collect in the next 3 weeks.

  92. JNJ/Eph – I have no idea what an easy spread is anymore but JNJ is a good one.   That spread is a very good deal but you may have to chip in another $1 or so to roll the caller to the Dec $65s if they pop.

    CROX/Steve – I gave up on them but $2 was so ridiculous for them (as was $5 for LVS)

    We’re rockin’ now.   Even INTC and MSFT pulled it together.  If GM moves then you know it’s all over for the bears…

    Head fakes/Peter – If it wasn’t the last day of the month I wouldn’t be worried but this is just way to convenient with the election on Tuesday and all.  If we’re going to have a rally, there’s another 1,000 points to go but this is just the 1,000-point gain we expected off the Fed as we started the week at 8,400.  It’s also worth noting that we started the month at 10,500 so this is a 50% bounce off a low made early in the month, think of a ball bouncing in this pattern and decide if it looks like the next bounce will be higher or lower.   Without fuel, something to change the trajectory, it’s going to be very hard fro us to keep going up.  If you look at 10/10, it was a higher low close at 8,451 than we had on Monday and it was a higher bounce close, 9,387, than we are likely to get today.  So that’s a lower low and a lower high this week than at the beginning of the month – that’s the long-term technical if we fail 9,400 at the close and the NYSE is even worse off if they can’t take back 40% and the RUT 10 points higher (546) last week so this is not a big deal.

    I’m not trying to be super bearish but I strongly urge caution into the weekend as it will be easy to join a huge Obama election rally if that’s what we’re getting but if this is just a nasty end of month fake, we can drop real fast on Monday.

    FXP/RMM – Why would they move up?  They are ultra short China and we are having a good finish so logic is China will open well on Monday.  On the FXIs – I’d be taking them off the table as they had a good run and a good Monday is already priced in at $25.50.

    It’s a cold, cold market Matt!

  93. Speaking of China, BIDU having a terrible day.

  94. Congress makes me puke.  They complain about the big bonuses and salaries but then spend billions on pork with very little accountability.  When you look through the bills it is hard to know what backroom deal was struck to get the pork into the bill.  Congress needs to be made more accountable and audit what they do as much as what they want to do to businesses.

  95. ICE starting to look shaky. Tried to come up with something to support "Breaking the ICE", but its been a long day.

  96. Phil,  I have been watching ICE today.  The stock is down  almost $4 and the calls are up and the puts are down.  How can that be?

  97. TC – For the reason I posted earlier. Because they printed a bogus $87 close when the bid/ask was 82/83, so for the majority of the day, its traded at 84-85, so it was really ‘up’ from yesterday.

  98. Phil: the FXP trio as of yesterday: nov 90 call, nov 130 caller, nov 160 caller,
    what is your expectation ?

  99. Looked like another 3 pm buy program followed by a 3:10 sell.   Not sure this is going to turn.

  100. From John Jansen:

    Here is a note that economists at Credit Suisse distributed on the Chicago PMI. In their opinion it is worse than scary.

    CHICAGO PMI 37.8 Oct vs 48.0 consensus, 56.7 Sep

    New Orders 32.5 Oct vs 53.9 Sep

    Production 30.9 Oct vs 71.4 Sep

    Employment 41.5 Oct vs 49.1 Sep

    Inventories 56.5 Oct vs 37.7 Sep

    Prices Paid 53.7 Oct vs 80.7 Sep

    Scary doesn’t do this report justice.  This abysmal report follows all other pre-ISM regional reports which carried the same tone – an abrupt change occurred in Oct.  The plunge in the headline index left it at the lowest level since the 2001 recession.  Demand side indicators collapsed. 

    The 21.4 point drop in New Orders was the worst since the series began in 1968; the 40.5 drop in Production was the worst since its inception in 1946!  The excess supply signal has never been worse – the New Orders-Inventories spread was -24.0.  Price pressures eased rapidly – the 27.0 point drop in the Prices paid index was a record since 1946!

  101. Is the market open when the US votes ?

  102. JonJansen/Phil:  So he’s saying we’re going to rally?                           kidding.

  103. Steve

    At least Congress stands for elections.  I’d have much less problems with corporate salaries if shareholders could nominate directors.  As it stands now, CEOs pick there "bosses" and then shower them with goodies and the board members go along like sheep.

  104. So the next set of earnings report should be pretty bad.  Maybe this will all be the final flush to take us down one last time and what we have now is a bear bounce before we head lower.

  105. ICE/TC – Aside from Dan’s good point, there is a bit of supply and demand in the pricing.  Obviously no one wants to believe they can go down and a lot of people think they will go to the moon on this "fantastic" CDO sceme.  Like I said, this is going to be one fantastic sell-off when this story dies out…

    FXP/RMM – That spread was designed to pay off pretty much anywhere above 95 with small relative downside risk.  Of course with FXP trailing off today, it’s not looking  as good but the callers can always be rolled down too.  As our upside was actually weak today, I’m not sure I’d be rushing to change the mix with 3 weeks left (not to mention the above notes on the Chicago PMI).

    I think the market is open Tuesday.  It’s not much of a holiday except for schools and government things. 

    It really looks to me like "they" are determined to print those numbers and it’s a hell of an opportunity for someone who does need to cash out to dump into the close as there is a massive push to keep the indexes up here.

  106. Singapore Steve:
    what is your profession ?
    what is your view about my AAPL nov 100 and 105 callers ?

  107. Nice dump! (the market one, that is)

  108. What a house of cards.  Just amazing how they can push the pedal down when they want to.

  109. GNW at $4.65 is ridiculously low, they have more cash on hand than the total market cap.  PEG is 0.2!!!!  Selling the $5 puts and calls for $2 puts you in at $2.65!

  110. RMM
    Been retired for the last 2 years.  Was a product engineering manager.  Applying for a Mfg Engineering management job down in Eugene
    AAPL   I thnk they are more likely to go down than up over the next 3 weeks.  Nov 15 is last day for liquidation. Today is last day of the month.   The PMI does not really support much of a move up.  A lot easier to go down than up.  If you thionk AAPL will close around 110 in 3 weeks then best to roll up from 100 to 105 early but it is good protection now so I would wait to see what next week brings.

  111. PHIL Ref GNW. FYI Zack rated the as SELL on 10/27/08

  112. Singapore Steve: miss my 6 digits also, but I am now too old to get a job, am a chemical/petroleum engineer.

    Txs for comment

  113. MTU is another company with a healthy balance sheet with as much cash as cap.  They are at $6.24, which is not a very good spot for selling calls but Dec $7.50 calls can be sold for .50 and $5 puts can be sold for .55 and that knocks you down to $5.20, which isn’t bad

    GNW/Bro – Screw Zak, these guys were part of AXP when I followed them and they are a good long-term company and $4.65 is an insane price as their client base is generally HNW Amex cardmembers who are not being ravaged by the economy and certainly not enough to justify aq 75% sell-off since early Sept (down about 80% for the year).

  114. Man – can there be any doubt that it was VERY important to close at these levels, we just had a 100-point reversal in the last 5 mins!

  115. AMZN
    Check out the amzn chart, big spike at the end.  I managed to get my covers sold with 5 seconds before the bell.

  116. Well that was way fun – have a good weekend everyone!

  117. Yep, they were defending against a sell program for the 20 minutes but fortunately for them it ended with 5 minutes left for them to paint as fast as they could!

  118. Bah, Qs blew 33!  That was the one level we really wanted to hold too!

  119. RMM
    2500 sq ft around 350K -450K on ave in Corvallis.  A wide range though. And a buyers market with all of the layoffs from Hewlett-Packard here so probably less than listed.